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Revenue Recognition Performance Reporting

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Discuss About The Revenue Recognition Performance Reporting?

 

Answer:

Introduction

JB Hi-Fi Limited is a pioneer in the retail sector of the home consumer products. It is engaged in the sale of electrical products that cater to the consumer that includes television, cameras, software, etc. it has also a diversified business where it focuses on consultation and IT service. For the preparation of this report, the annual report of 2016 is selected. The report revolves around JB-Hifi and its financial report. The report initiates with the introduction of the company followed by the activities of the board. Further, an in-depth analysis is made on the investment and the financial decision made by the company.  The corporate governance mechanism is studied in the light of JB-Hifi.  Basically, the report aims to provide a deep insight into the functioning of the company together with the operations. Further, the report aims to provide a strong insight into the performance of the company through the computation of the ratios.

 

Company overview

JB Hifi Ltd is primarily an Australian and New Zealand retailer of consumer items mainly specialization in video games, CD’s, Blu-rays, electrical home appliances, hardware, etc. The group also provides various consulting and technology services to its customers. For such purpose, it has around sixty home branded stores that allow it to provide various kinds of services throughout New Zealand and Australia. JB Hifi also provides various solutions like government, corporate, and education sale of items and services, and replacement of insurance services as well. The company is believed to be one of the fastest growing and successful companies in Australia that is listed on the ASX and headquartered in Melbourne (JB-Hifi, 2016). Moreover, it also continues to stock various premium quality products that assist it in redressing the requirements of consumers. Further, in relation to financial performance in the year 2016, the company attained massive enhancement in the dividend, sales, and profits that can be attributed to its low-cost operations throughout the year. In 2016, the Group obtained sales of $3.95 billion that is approximately 8.3% extra in comparison to the last year. Further, the net tax profit of the company also reported an increased figure of $152.2 million that is 11.5% more than the last year (JB-Hifi, 2016). Similarly, the total dividend also enhanced by ten cents in the current year that is a positive indicator in terms of fulfillment of objectives. The low cost of doing the business of the company (15.2%) is the major reason behind such developments in these segments that allows it to be at a competitive advantage in comparison to other primary competitors. Overall, the company has full capability to bring brands to life and establish engagement in several categories. Besides, high range of loyalty and trust from its customers has assisted the company to make additional developments in various segments (Porter & Norton, 2014).

Overview of Board of directors

Name

Gender

Education

Remuneration ($)

Career history

Greg Richards

Male

Bachelor of Economics (Hons)

2,90,000

He was appointed to the Board in 2007 and thereafter, he became chairperson in 2012. He also worked at Goldman Sachs for 19 years. Presently, he is the chairman and member of the Remuneration Committee and is also a non-executive director of Vitaco Holdings Ltd.

Beth Laughton

Female

Bachelor of Economics

1,66,093

She spent more than a decade in corporate finance after qualifying as a CA. For the initial twelve years, she concentrated on entertainment, telecommunication, and information technology. Beth was also the chairperson and non-executive director of Sydney Farris, a non-executive director of Port Adelaide Maritime Corporation, member and non-executive director of ASX Audit Committee. She became the chairperson of JB Hifi in June 2012 but was later appointed to the company’s remuneration committee (JB-Hifi, 2016).

Gary Levin

Male

Bachelor of Commerce and LLB

1,56,000

He spent more than thirty years in the field of investment, retail, and renewable energy fields. Presently, he is on the Board of Baby Bunting Group Ltd. In JB Hifi, Gary has been a director since 2003 and is also a member of Audit and Risk Management Committee and Remuneration Committee (JB-Hifi, 2016).

Wai Tang

Female

MBA, BAppSC, and GAICD

1,15,201

She became the member of the Audit and Risk Management Committee of the company with significant experience in retail industry. She also served as the general manager for Pacific Brands and co-founded Happy Lab Retail Confectionary Concept (JB-Hifi, 2016). Moreover, she also served as non-executive directors of various other companies.

Richard Uechtritz

Male

 

1,30,000

He is a co-founder of photo chains like Kodak Express and Rabbit Photo. He also became the director Kodak. Moreover, through high experiences in retailing, he became the CEO and managing director of JB Hifi in 2000.

Richard Murray

Male

Chartered Accountant, B.Com, Grad. Dipl. Finance and Investment

2,750,596

He started as a CEO with twenty years experience in finance and retailing. He joined JB Hifi as a CFO but before, he operated under Deloitte for around ten years (JB-Hifi, 2016). He is currently the chairman of Australia Charities Fund Employer Leadership Group

James King

Male

B.Com, FAICD

52,000

Appointed in May 2004 and retired in October 2015. He further served as a chairman

 

Assessment of the Board characteristics

It is solely the responsibility of the board to provide pace to the shareholder values and take it to the expected    price (Deegan, 2011). It is very much obvious that the board holds the key to the performance of the company which affects the share price and thus the board is totally answerable to the shareholders of the company. Corporate governance of the company and stabilizing the company are the major tasks of the board (Brealey et. al, 2011).  It is the duty of the Chief Executive Officers of JB Hi-fi to pay attention to the profitability and stability of the company in order to increase it and to be answerable to the board solely (JB-Hifi, 2016).  In order to fulfill its duty, the key factors that the company look for our experience, skills, diversity, knowledge, and perspective. These can be attained by undertaking a mixed range of people with these qualities (Christensen, 2011). These mixed qualities of skills, experience, and gender provide with the exchange of ideas and advanced thoughts which would be very helpful in governance and decision-making (Spiceland et. al, 2011).

The below-mentioned point is some of the departments in which expertise and skill are needed by the company to function well and to increase its profit ratio. As per the records put up by the board, it is seen that the company has a well-proportioned mix of such people who excel in such areas and can lead the company to an uprising (JB-Hifi, 2016). They can effectively [plan the company’s working and can make the committee’s decision-making easy.   

  • Executive/effective experience
  • Retail expertise and experience
  • Operational management and experience
  • Financial Expertise
  • Property Expertise
  • Mergers & Acquisitions expertise and experience
  • Governance expertise and experience
  • Other board experience
  • Experience in setting executive remuneration
  • Risk management expertise and experience

JB has a large percentage of non-executive directors in comparison to that of the executive directors. At present JB have six directors in its board of which five are non-executive and the only executive one id the chief executive director. It is a good move for the company to offer electoral or non-electoral data to the shareholders of the company. 

It is also paid attention that the company undergoes a series of exams and scanning procedures before presenting a candidate for the elections.

Important investment or financing decisions

It can be observed from the annual report of the company that it has invested around $52.3 million in the capital expenditure project that consists of the opening of new stores, conversion of its Home stores, upgradation, and relocation of stores, and online projects. The Group believes that such investment activities can assist it in enhancing the growth of earnings in the upcoming tenures. Besides, the company also believes that online presence can generate a significant impact on its development. Thus, it continues to make significant developments in its online sites that include transformation and up-gradation of its sites in New Zealand. The company also intends to maximize its investments in IT security measures over the years so that breach of such systems can be minimized to a greater extent. In addition, the company is also focusing on 75 Home stores throughout New Zealand and Australia, and for such purpose, it makes relevant investments in supply chain, training of staff, investment in store wages, etc (JB-Hifi, 2016). This can assist in placing the company in a very good position in the market and enhancing its developments throughout the countries.

Key Recommendations of the ASX Corporate Governance Principles

1.             Director remuneration must be ample to retain and attract high-quality directors

2.             Every listed company must operate responsibly and ethically.

3.             Every listed company must disclose their management roles and process of monitoring their performance.

4.             Every listed entity must make balanced and timely disclosure of all material items that can influence decision-making.

5.             Every listed company must have a board of an appropriate composition, size, and skills.

6.             Every listed company must attempt to respect the shareholders’ rights by offering them adequate facilities and details to assist them in exercising their rights.

External audit function

The presented auditing report has been made by keeping in attention the Corporate Act 2001 which deals with the independence importance of the auditors. It is fully satisfying and legitimate and real that the data of the Corporate Act 2001 which was provided to the company of JB Hi-fi is similar and fully matches with the one which is written and depicted in this report of the company (JB-Hifi, 2016). All these instructions were given to the board of directors at the time of enactment and also at the time of the representation of this report by the company.

Auditor’s remuneration      :                                                                                                               

2015                      2016

Audit and other services

Audit and review of group financial statements                       333000                 323500

Audit and review of subsidiary financial statements                  29800                   29000

IT services (I)                                                                      58216                 511507

Total remuneration for audit and other services                       421016                 864007

(I) Customer Relationship Management Tool was the main plan of the company for which the Deloitte auditing firm was associated with the company from 30 June 2015 to 30 June 2016. 

It is to be mentioned that the auditing firm of the JB Hi-fi company if Deloitte Touche Tohmatsu (JB-Hifi, 2016).

Measures to ensure ethical judgments

In order to ensure that the business of the company has a high level of ethics and ethical judgments, it has adopted a Code of Conduct that is offered to the employees, executives, and directors with adequate guidance on what acceptable behavior is deemed to be. For such purpose, the company has attempted to respect the rights, freedom, and dignities of its employees, provided a working environment that is rewarding, challenging, and safe, respecting the sensitive and personal details of its employees, customers, and suppliers, compliance with all the rules and regulations, and identifying the achievements of every employee. Furthermore, the company has also ensured that its auditors always follow the Australian Accounting Standards for conducting the audit process. Moreover, these standards necessitate that the auditors comply with the significant ethical requirements in relation to the engagement of audit and performance of audit in a way that can assure whether the financial information forming part of the annual report is free from any kind of material misstatement or not (JB-Hifi, 2016). Overall, the management and Board also endeavor in establishing higher standards of corporate governance in its framework that ensures fulfillment of ethical responsibilities throughout the company.

Top Investors

The top 5 investors of JB-Hifi are as follows:

Name

Equity

Percentage

AustralianSuper Pty Ltd.

10,185,705

8.87%

Legg Mason Asset Management (Australia) Ltd.

9,383,772

8.17%

UniSuper Ltd.

6,847,103

5.96%

Ellerston Capital Ltd.

5,985,908

5.21%

Airlie Funds Management Pty Ltd.

5,918,853

5.16%

It is to be noted that the major investors or the top five investors of JB-Hifi are corporate. This means that the percentage of holding is more when it comes to the corporate. It provides a fair indication that the company is able to deliver and this is the sole reason why the corporate is more involved in it. Further, the major components of shareholding are derived from other companies that mean the expectation is high as compared to other companies (Horngren, 2013). The composition of equity holding by other companies sheds light on the future prospects of the company and provides a general idea of the fundamentals of the company  (JB-Hifi, 2016). The holdings will even give a fair idea how the equities are divided in terms of individual investors and the companies.

 

Ratio Analysis

The ratio analysis of JB-Hifi Ltd has been done by considering the year 2016. The analysis is as follows:

Liquidity – the liquidity ratio denotes the ability of the company to honor the obligations. It plays a crucial role in raising funds and loans from banks. As per the computation, it can be commented that the current ratio of the company is strong as it is more than 1 and near to the standard ratio of 2:1 so in all probability, it can honor the obligations and raise more funds by procuring a loan from banks (Choi & Meek, 2011). However, the acid test ratio that excludes stock is weak for the company as it is below 1 and hence an alert for the management. This means that including the inventory it has more liquidity (Wagenhofer, 2014).

Efficiency – This ratio denotes the fashion in which the companies have used the resources or assets to generate income. As per the computation of the ratios, it can be said that the total asset turnover and the equity turnover of the company is formidable meaning the company has used the assets effectively (Davies & Crawford, 2012). This provides a strong stability of the company and is one of the major reasons why the company is earning profits. The total asset turnover ratio increased in 2016 while the equity turnover declined marginally.

Leverage – It indicates the amount that is funded by debt and equity. In short, the investor’s contribution and the debt contribution is provided adequate emphasis. The equity ratio determines the contribution by the investors and in the case of JB-Hifi, it is below .50 meaning that the contribution is low as compared to the debt funding (Subramanyam & Wild, 2014). On the other hand, the debt-equity ratio is high that denotes the debt component in the organization in tune to the equity (Shah, 2013). Any debt-equity ratio above 1 is higher and is an alert to the management as more reliance is in

 
Profitability – the profitability indicates the ability of the company to generate returns. The profitability of JB-Hifi has been determined through the gross profit and the net profit ratio. Both the ratios are positive for the company. However, the rates of increment in both the ratios are marginal (Albrechtal, 2011). Therefore, the company needs to stress upon the operational cost so a better profit percentage can be attained. Both the ratio projects how effectively the company can extract profit from the operations. Hence, the profitability of the company stands in stable and consistent. (Guerard, 2013)
 
Market value – the market value of the shares can be determined by the earnings per share. The companies that contain future earnings on a higher note are required to provide more dividends or appreciate the stock in the future. The PE ratio of JB-Hifi has dropped in 2016 that does not augur well for the company. However, the total scenario projects that the expected price is strong as compared to the earnings. This denotes the share value of the company or the worth that it can fetch. The EPS projects that if the company distributes every dollar of income then 1.51 dollar will be received by the shareholders. Hence, on an overall basis, JB-Hifi has strong fundamentals and the market value projects that the company can deliver in the long run (William, 2010).
 
Cash Flow management – the cash flow management is an important tool that helps in providing a general idea about the cash inflow or outflow of the company. This has been done for JB-Hifi by computing the operating cash flow ratio and cash flow margin ratio. The operating cash flow ratio of JB-Hifi is less than 1 meaning the company has generated less cash to repay the obligations in the near term (Berk et. al, 2015). A higher ratio is always vouched for in this scenario. On the other hand, the cash flow margin ratio ranks lower that is not a good indicator as a higher ratio is always better in terms of investors and other related parties. When the percentage is higher, the better is the performance (Graham &Smart, 2012).
 

Conclusion

Going by the overall report, it can be said that the company JB-Hifi has strong fundamentals and that it has operated in a profitable fashion in the past two years. The overall scenario of the company is a strong indication of the fact that JB-Hifi has adhered to the accounting policies and that the structure of the board is presented in a manner that enables proper management. Further, the compensation is in tune to the activities of the executives and is justified. Moreover, the company follows string ethical structures and hence, it is highly successful in attaining a topmost position. The ratio indicates that the company has delivered in the past two years and will continue to do so going by the strong fundamentals of the company. Few lagging indicators can be converted to a strong one by the strong activity of the management. Thereby, JB-Hifi ranks high when it comes to the selection of the companies for the purpose of investing.

 

References

Albrecht, W, Stice, E. & Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western.

Berk, J, DeMarzo, P & Stangeland, D 2015, Corporate Finance, Canadian Toronto: Pearson Canada.

Brealey, R, Myers, S & Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin.

Choi, R.D & Meek, G.K 2011, International accounting,  Pearson .

Christensen, J 2011,  ‘Good analytical research’, European Accounting Review, vol. 20, no. 1, pp. 41-51

Davies, T & Crawford, I 2012, Financial accounting, Harlow, England: Pearson.

Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill.

Graham, J & Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning.

Guerard, J. 2013, Introduction to financial forecasting in investment analysis, New York, NY: Springer.

Horngren, C 2013, Financial accounting,  Frenchs Forest, N.S.W: Pearson Australia Group.

JB-Hifi 2016, JB-Hifi Annual report & accounts 2016, viewed 28 September 2017 https://www.jbhifi.com.au/Documents/2016%20JB%20Hi-Fi%20Annual%20Report_ASX.pdf

Porter, G & Norton, C 2014, Financial Accounting: The Impact on Decision Maker, Texas: Cengage Learning

Shah, P 2013, Financial Accounting, London: Oxford University Press

Subramanyam, K & Wild, J 2014, Financial Statement Analysis, McGraw Hill

Spiceland, J, Thomas, W. and Herrmann, D 2011, Financial accounting, New York: McGraw-Hill/Irwin University Press

William, L 2010, Practical Financial Management, South-Western College.

Wagenhofer, A 2014, The role of revenue recognition in performance reporting, OxfordUniversity Press

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